Stereotypes, segregation, and ethnic inequality

Abstract

Disparities in economic conditions among different ethnic, racial, or religious groups continue to be
serious concerns in most economies. Relative standings of different groups are rather persistent, although
some groups initially in disadvantaged positions successfully caught up with then-advantaged groups. Two
obstacles, costly skill investment and negative stereotypes or discrimination in the labor market, seem to
distort investment and sectoral choices, give rise to skill and labor market segregations by ethnicity, and slow
down the progress of disadvantaged groups.

How do these obstacles affect skill investment and sectoral choices of different groups and the dynamics of
their economic outcomes and inter-group inequality? Is affirmative action necessary to significantly improve
conditions of subordinate groups, or redistributive policies sufficient? In order to tackle these questions, this
paper develops a dynamic model of statistical discrimination and examines how initial economic standings
of groups and initial institutionalized discrimination affect subsequent dynamics and long-run outcomes.

[5] Bayard, K., J. Hellerstein, D. Neumark, and K. Troske (1999), “Why are racial and ethnic wage gaps
larger for men than for women? Exploring the role of segregation using the new worker-establishment
characteristics database,” NBER Working Paper No.6997.